Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 1 of 116 1 MILBERG WEISS BERSHAD HYNES & LERACH LLP 2 WILLIAM S. LERACH (68581) THOMAS E. EGLER (189871) 3 401 B Street, Suite 1700 San Diego, CA 92101 4 Telephone: 619/231-1058 619/231-7423 (fax) 5 - and - PATRICK J. COUGHLIN (111070) 6 RANDI D. BANDMAN (145212) SYLVIA WAHBA (197612) 7 ELI R. GREENSTEIN (217945) 100 Pine Street, Suite 2600 8 San Francisco, CA 94111 Telephone: 415/288-4545 9 415/288-4534 (fax) 10 Lead Counsel for Plaintiffs 11 UNITED STATES DISTRICT COURT 12 NORTHERN DISTRICT OF CALIFORNIA 13 OAKLAND DIVISION 14 15 In re APPLE COMPUTER, INC. SECURITIES ) Master File No. C-01-3667-CW LITIGATION ) 16 ) CLASS ACTION ) 17 ) FIRST AMENDED CONSOLIDATED This Document Relates To: ) COMPLAINT FOR VIOLATION OF THE 18 ) SECURITIES EXCHANGE ACT OF 1934 ALL ACTIONS. ) 19 ) DEMAND FOR JURY TRIAL 20 21 22 23 24 25 26 27 28 Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 2 of 116 1 TABLE OF CONTENTS 2 Page 3 4 I. OVERVIEW ....................................... 1 5 A. The G4 Cube ................................... 3 6 B. The Power Mac .................................. 7 7 C. The K-12 Educational Sales "Train Wreck" .................... 9 8 D. Apple's Financial Health and 4Q00 Prospects ...................11 9 E. Inventory Levels and Gross Margins ........................12 10 F. Other Issues ....................................13 11 II. INTRODUCTION ....................................14 12 III. JURISDICTION AND VENUE ..............................20 13 IV. PARTIES .........................................20 14 V. BACKGROUND TO THE CLASS PERIOD .......................22 15 VI. DEFENDANTS' WRONGFUL COURSE OF CONDUCT AND FALSE AND MISLEADING STATEMENTS ..............................25 16 A. False Statements Made During Macworld New York: July 18-19, 2000 ......25 17 1. False Statements Made During Jobs' Speech and Investor Conference 18 Calls ....................................25 19 2. July 20: Media Reaction ..........................28 20 3. July 20: Investment Analyst Reaction ....................30 21 4. July 25-31: Magazine Reaction .......................35 22 5. Summary of Apple's July 2000 False and Misleading Statements ......39 23 B. Reasons Why Apple's Macworld Statements Were False and Misleading When Made ....................................39 24 1. Apple's Undisclosed Product Problems ..................40 25 a. The G4 Cube: Pre-Macworld Design and Production Problems ..40 26 b. Post Macworld: Cube Problems Intensify in August and 27 September 2000 ..........................45 28 c. The Power Mac ..........................52 FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - i - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 3 of 116 1 Page 2 d. The iMac .............................56 3 2. Apple's July 18, 2000 Statement that Its K-12 Sales Force Transition 4 Had "Progressed Nicely" Was False When Made .............57 5 a. The Role of Apple's Agents ....................57 6 b. The Consequences of Apple's Decision to Fire Its Agents .....59 7 3. Apple's Knowledge that the K-12 Education Sales Force Transition Had Not "Progressed Nicely" as of July 18, 2000 .............61 8 a. Jobs' Admissions ..........................61 9 b. Apple's Knowledge Based on Its Real-Time Education Sales 10 Tracking System ..........................62 11 4. Apple's Knowledge that Its 4Q00 Financial Projections Had No Reasonable Basis .............................65 12 C. Post-Macworld: Further False and Misleading Statements .............69 13 1. August Statements .............................69 14 2. Late August Statements ..........................69 15 3. August 25-30: Top Apple Executives Bail Out ...............72 16 D. Reasons Why Apple's August 2000 Statements Were False and Misleading 17 and Apple Knew It ................................73 18 1. Statement that "Both Back-to-School and Education Sales Have Accelerated as Seasonally Expected"....................73 19 2. Statements that Apple Was "Comfortable" and "On Track" to Deliver 20 $2.0+ Billion and $0.45 EPS ........................74 21 3. Statements that Inventory Was Being Effectively Managed and "Pricing Actions on Older Inventory Have Already Been Taken and the 22 Company Does Not Anticipate Needing to Take Additional Action in FQ4" ...................................76 23 4. Statement that Apple Was "On Its Shipment and Availability Plan" .....79 24 5. Statements that Cube Orders Were "Strong," Customer Acceptance 25 Was "Good," the Cube Would "Drive the Quarter" and Apple Had Sold "Tens of Thousands" of Cubes ....................79 26 E. September Statements ...............................80 27 1. September 13, 2000: Jobs' Statements in Paris and During CNBC 28 Interview ..................................81 FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - ii - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 4 of 116 1 Page 2 2. September 21, 2000: Questions Start ...................82 3 3. September 28, 2000: Morning – All Is Rosy ................82 4 F. Reasons Why Apple's September Statements Were False and Misleading and 5 Apple Knew It ...................................83 6 1. Jobs' Statements that He Was "Extremely Happy" with Sales of the G4 Cube; that the New Products Gave Apple "the Strongest Product Line 7 Apple Has Ever Had;" and that a Rumored Cube Shortage Was Because "Demand Was Greater than We Thought It Would Be" ......83 8 2. Apple's Statements that: (a) It "Remains Comfortable with Consensus 9 FQ4 Revenues Expectations" (September 6, 2000); (b) Back-to- School Demand Has "Accelerated as Expected" (September 6, 2000); 10 (c) Apple's 4Q00 Was "Tracking on Plan" (September 8, 2000); and (d) Apple Would "Hit" Its 4Q00 Forecasts (September 13, 2000) .....84 11 VII. ADVERSE FACTS BEGIN TO COME OUT ......................84 12 VIII. INSIDER STOCK SALES ................................97 13 A. Apple's Senior Officers' Stock Sales Were Unusual and Suspicious .........97 14 B. Options Valuation Provides Additional Evidence of Scienter ...........105 15 C. Statistical Analysis Provides Additional Evidence of Scienter ...........109 16 IX. CLASS ACTION ALLEGATIONS ...........................110 17 X. NO SAFE HARBOR ..................................111 18 XI. CLAIM FOR RELIEF ..................................112 19 XII. PRAYER FOR RELIEF .................................113 20 XIII. JURY DEMAND ....................................114 21 22 23 24 25 26 27 28 FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - iii - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 5 of 116 1 I. OVERVIEW 2 1. This First Amended Consolidated Complaint ("Amended Complaint") asserts facts 3 demonstrating that defendant Apple Computer, Inc. ("Apple" or the "Company") and its employees made 4 false and misleading statements regarding its new products, education sales and Apple's overall financial 5 condition between July 19, 2000 and September 28, 2000 (the "Class Period"). The false and misleading 6 statements began at meetings and presentations held in connection with the annual "Macworld" Conference 7 (July 18-19, 2000), and ended with an Apple press release admitting that its fiscal year-end quarter 8 ("4Q00") would be a disaster for the Company (September 28, 2000). Just two weeks before the bad 9 news hit, Apple's Chief Executive Officer ("CEO") Steven P. Jobs ("Jobs") reassured investors, telling an 10 interviewer on CNBC that he was "extremely happy" with sales of the Power Mac G4 Cube ("G4 Cube" 11 or "Cube") and that Apple's new products gave it "the strongest product line that Apple has ever 12 had." When asked point-blank about a rumored shortage of Apple's G4 Cube, Jobs stated that Apple 13 had already shipped "many tens of thousands" of Cubes. Jobs ended the interview by stating "I think 14 we're going to hit our forecasts this quarter, so if [G4 Cubes] are hard to find, I think that's 15 because demand is greater than we thought it would be...."1 Two weeks later, Apple announced 16 what later turned out to be a 25% earnings per share ("EPS") miss, a close to 2% gross margin miss, and 17 a $180 million revenue shortfall, $90 million of which was directly attributed to lower than expected G4 18 Cube sales. 19 2. Apple's misrepresentations during the Class Period primarily related to: 20 (a) Apple's three new products: the G4 Cube, the Power Mac G4 Dual Processor 21 ("Power Mac"), and updated versions of the iMac; 22 (b) A major overhaul of Apple's sales model for K-12 schools; 23 (c) Apple's component part and finished goods inventories; and 24 (d) Apple's financial health and prospects for 4Q00 and fiscal year 2001 ("FY 01"). 25 26 27 1 As Apple's CEO, Jobs is named only as a "control person" defendant under §20(a) of the Securities Exchange Act of 1934 ("Exchange Act") because he possessed the power and authority to cause 28 Apple to engage in the wrongful conduct alleged herein. See ¶¶272-273 (second claim for relief). FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - 1 - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 6 of 116 1 3. The facts plead, which are based in part on information provided by 39 confidential 2 witnesses ("CWs"), show that Apple's top executives knew about severe problems plaguing every 3 important business area upon which Apple based its positive statements and 4Q00 financial forecasts. The 4 facts plead also show that the officers making the statements were personally kept appraised of the status 5 of such problems. 6 4. On December 11, 2002, this Court dismissed plaintiffs' Consolidated Complaint with leave 7 to amend (the "Order"). In its Order, the Court found that although plaintiffs "plead the existence of 8 extensive problems" with the Cube, and showed other product problems, the complaint lacked the evidence 9 showing exactly how defendant Apple knew, or consciously disregarded those problems. Order at 24-25.